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Funding education of the next generation

A high priority and arguably the number one goal for Australian families along with paying off the mortgage is providing for their children’s education.

Private-school fees rise more quickly than inflation. Fees at most schools rise each year between 5.5 per cent and 7.5 per cent, when inflation is about (now less than) 3 per cent a year. Fees at the most expensive schools are fast approaching $30,000 for the final year. And the total costs, of course, are more than just the tuition fees. [1].

For example, if you send two children to a private high school which costs an average of $20,000 a year for each child, by the time they both graduate you will have spent $240,000 on school fees. And that's not counting extras such as school uniforms, excursions and extra-curricular activities[2].

For parents, establishing a savings plan early is key. Often grandparents are stepping in to help out with this expense to provide opportunities for the next generation.

While setting up a low interest bank account is one option, another option often overlooked is an education bond. This is a simple, flexible and tax effective way to invest for a child’s education.

The education bond operates as a ‘scholarship plan’ that means it is eligible for tax concessions which are not generally available for other savings and investments. They are designed to cover primary, secondary and a range of tertiary education expenses including special needs education (uniforms, tuition fees, books, course fees, materials, student union fees, etc). The bond also covers expenses such as accommodation, travel and equipment if they are related to education. Non-education withdrawals can also be made from the bond.

Most education bonds offer investment options such as cash, fixed interest, shares, property or a range of diversified investment options. They are available for investments as little as $1,000 and allow additional regular contributions over the life of the bond. They are designed to be held for at least ten years to reap the full benefits. The education bond provides flexibility and can be held in the name of the parent, grandparent, uncle, aunt or anyone aged 16 years or over without impacting personal tax provided the funds remains invested in the bond for at least ten years. Withdrawals can be made at any time, but withdrawal before the ten year period are subject to tax on distributed income (contributions can be withdrawn tax free). If no withdrawals are made within the ten years, earnings on the bond will be tax-free.

Earnings generated by the bond are taxed at 30% compared to the highest marginal tax rate of 47% inclusive of the Medicare levy (the effective rate may be lower due to franking credits and tax deductions). This means that education bonds are a highly attractive savings vehicle for long-term education purposes, especially for those on higher marginal tax rates.

If you need help with a financial plan to save for your children's education, or if you need more information about education bonds, consider getting financial advice from a qualified financial adviser or contact your usual Grant Thornton advisor, or:

This information is intended to provide general advice only and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. If you are considering acquiring or continuing to hold a particular financial product, you should obtain the Product Disclosure Statement (PDS) relating to the product and consider this before making any decision. The information in this document been prepared by Grant Thornton Wealth Advisory Services Pty Ltd ABN 61 007 073 305 AFSL 234500.